Kansas school-funding ruling a ‘negative’ on state’s credit report

Topeka  A leading credit rating firm says a recent Kansas Supreme Court ruling on school funding was a “negative” event that puts even more pressure on the state’s ability to pay its debts.

Moody’s Investor Service, one of the leading credit rating firms in the country, raised the concerns in its weekly public finance outlook issued late Thursday. Analysts noted that complying with the court’s order to increase funding for two special funds aimed at equalizing spending in poor districts constituted a “credit negative” for Kansas. The state is rated by Moody’s as an Aa1 negative outlook.

Analysts said complying with the ruling “will further pressure state finances which are already stressed by revenue losses from income taxes.” They noted that additional spending could be required if the courts find that Kansas must increase overall spending to improve the adequacy of education funding.

“Any increased aid following the court decision will likely be used to reinstate recently cut programs or undertake deferred capital projects, rather than to bolster district fund balances or cash positions,” the analysts wrote.

Bond ratings are used to identify a certain level of risk associated with investing. Better ratings can command lower interest rates for the government entity issuing the bonds because there is greater certainty that they will be repaid.

Sara Belfry, spokeswoman for Republican Gov. Sam Brownback, said despite the analysis Kansas still had a strong bond rating, noting that Standard & Poor’s rates the state’s credit at AA+ with a positive outlook.

“Thursday’s statement from Moody’s hasn’t changed the credit rating of Kansas,” she said. “Kansas remains in a strong position to grow the economy.”

Legislators haven’t decided how they will respond to the ruling or where the funding would come from, though there are several options. The state could tap existing cash reserves and pay the full amount, make adjustments elsewhere to other education funds or state agencies to find the funds or roll back recent tax cuts to generate new revenue.

House Minority Leader Paul Davis has called on legislators and Brownback to act quickly to meet the court order. The Lawrence Democrat who’s running for governor said any solution may have budget consequences in coming years.

“I don’t think we ought to be pitting one priority like higher education or mental health versus other priorities,” Davis said. “This is why I think the Brownback tax plan was a mistake and continues to be a mistake.”

GOP leaders and House and Senate budget committee members have said in recent days that lawmakers probably won’t increase overall state spending by the full $129 million that the state Department of Education estimates would cover deficiencies in aid to poor school districts. The Kansas Supreme Court ruled last week that past cuts in the aid created unconstitutional gaps in funding between poor districts and wealthier ones and ordered legislators to fix the problems by July 1.

Brownback has repeatedly noted that, following the Great Recession, the state had virtually no cash reserves when he took office in January 2011, and those reserves rose to more than $700 million by the end of June. But the Legislature’s research staff projects those reserves will melt away by July 2017, largely because of personal income tax cuts enacted at Brownback’s urging, worth nearly $3.9 billion over the next five years.

The Legislature’s research staff projects the state will end June with cash reserves of $531 million and June 2015 with reserves of $248 million, but those figures don’t include the surplus in tax collections or budget adjustments that lawmakers are debating.

John Robb, a lead attorney for the plaintiff parents and school districts that filed the lawsuit against the state in 2010, said Friday that Moody’s comments weren’t surprising. The plaintiffs argued that Kansas exacerbated problems with school funding when the tax cuts were made instead of restoring education to previous funding levels.

“The grand experiment better ramp up in the next three years, or we’re going to have a train wreck. Moody’s appears to recognize that,” Robb said.